Multinational Marketers Move Into China's 'Smaller' Cities

Towns With About a Million People Are Tougher for Foreign Brands But Have More Consumers With Money to Spend

Demand for fast growth is driving multinational marketers into smaller and smaller cities -- but in China, small is a relative term.

China has over 160 cities with a population above one million. The U.S., by comparison, has nine. Most foreign marketers start with Beijing, Shanghai and Guangzhou and then add provincial capitals, but those markets, known as the first and second- tier cities, cover just a sliver of China's territory.

Today, companies are looking closely at China's third- and fourth-tier cities and beyond, where the creation of new wealth, particularly through manufacturing and industries like mining, has led to tens of millions of consumers with spending power.

Tier three spans about 150 county capitals, usually with more than 1 million people each, and tier four includes thousands of towns with more than 500,000 inhabitants. The tier system was created by marketers based on the idea that a white-collar office worker in, say, Chengdu, has more in common with office workers in Shanghai or Beijing than poor farmers with little education living nearby in Leshan.

It wasn't easy for trailblazers like Procter & Gamble Co. and Unilever. Incomes drop so quickly that even a can of Coke is pricey and even exotic.

"Anything [priced] above, let's say, 200 RMB ($31.50) is luxury for them.. 'Luxury' isn't about the brand of car--it's about having a car in the first place," said Jeffrey Tan, national research and insights director, China and Hong Kong, at Starcom MediaVest Group, this week on "Thoughtful China," an online marketing affairs talk show produced in Shanghai. Starcom recently completed a Yangtze Study research project about Chinese consumers in lower-tier cities across China http://adage.com/article/global-news/rural-chinese-online-videos-businesses/230441/ .

Consumers often have less exposure to Western brands and less interest in trying them. Local competition is extremely tough, since sales revolve around price and distribution more than branding, and local companies tend to be better at both.

Distribution is another challenge for new arrivals in the lower tiers, such as Western car makers, luxury and sportswear marketers and smaller package goods companies. Hypermarkets like Walmart and Carrefour are scarce in the lower tiers, so companies have to learn to negotiate with mom-and-pop stores that may not have air-conditioning, refrigerators or freezers -- which makes it hard to sell products such as ice cream bars, soft drinks and beer -- as well as distributors using carts tacked on to motorbikes or bicycles.

"The biggest difference is that third and fourth tier cities are smaller so people are much closer together. They are more community-like in their behavior, particularly compared to big cities like Shenzhen where everyone is transient," said Viveca Chan, chairman -- CEO of WE Marketing Group. Instead of shopping in chain stores, "they'd rather go to the neighborhood store, because they know that person, they can trust that person."

Over the last few years, digital media has become an important game-changer, in terms of communication, entertainment and shopping, making it easier both for lower-tier consumers to learn about foreign brands and for marketers to reach those consumers.

"We're seeing a digital evolution taking place," Mr. Tan said. "Online video is huge in China. We're seeing a lot of houses in lower tiers where they don't actually have TV sets at home. A lot of people are saying, 'My computer is now my TV.'"

Digital media isn't just changing the way consumers absorb entertainment and brand messages, it is also changing the way they shop.

"Availability of brands is no longer dictated by just physical retail presence. A lot of people in tier three and tier four cities are buying things online…on [Alibaba Group's B2C e-commerce website] Taobao, and that is somehow changing the entire spectrum of what people can buy and where they buy things," said Kunal Sinha, Ogilvy & Mather's chief knowledge officer for China.

Luxury products are one of the fastest-growing categories, and the internet plays a role there, too, by sharing trends from first-tier cities and the West.

For instance, lower-tier consumers "regard themselves as just as fashionable as upper-tier people. It's just that they have a different comprehension of [fashion tastes]," said Tim Schlick, DDB Group's head of strategic planning for Greater China.

Lower-tier consumers do focus on value, a calculation based on price, quality, reputation and the ability to provide the all-important Chinese sense of "face," Mr. Schlick said. "Lower-tier consumers tend to go the extra mile to find the brand that provides the most value. It doesn't matter if it's a local brand or international brand."

Normandy Madden is senior VP-content development, Asia/Pacific at Thoughtful China, and Ad Age 's former Asia Editor. See earlier episodes of Thoughtful China at www.thoughtfulchina.com.